Is there a law of diminishing returns on entrepreneurship?

Thomas Friedman is calling on President Obama to create a million new entrepreneurs as a way to rebuild an innovative economy and grow out the recession.

But as we have talked about here on multiple ocassions – can you just tweak public policy or make start up capital a little easier to access or is it not that simple?

Take Atlantic Canada. For close to 30 years the focus has been primarily on stimulating entrepreneurship. Way back when – pre ACOA the best minds determined that if Atlantic Canada was to be successful it would have to grow from within so everyone turned the focus to creating entrepreneurs. As a person working in and around the system for 20 years this is so. There were (are) programs to stimulate young entrepreneurs, women entrepreneurs, minority entrepreneurs, rural entrepreneurs. On EI? There’s a program to help you start a new business. On and on. I am sure there have been dozens of different programs all designed to help people start up small businesses.

But there is no evidence this has worked. In fact, a number of years ago I did some research that showed almost the opposite. In places like Alberta where there were far less government programs to stimulate entrepreneurship there seemed to be far more entrepreneurship.

I have come to the conclusion that entrepreneurship is a far more complex beast than most of us think. I have met likely hundreds of entrepreneurs over the years and some started up to make lots of money, others started because they had what they thought was a super idea, others were in big companies and got bored wtih the bureaucracy, others just can’t stand working for a boss, others were in universities and incubated a neat new idea, others – yes I have met a few – were just desperate and started a company to make survival income and it ended up taking off.

I also think it has a lot to do with risk. Entrepreneurs (and as I have said before I differentiate entrepreneurs from those people that want a lifestyle business and just an income) tend to be folks that like to take risks – they will cash out their RRSPs to start a business.

I have a theory (espoused here before) that successful entrepreneurial climates are those with a good mix of large, multinational firms that are training and providing experience to a class of potential entrepreneurs who get frustrated inside the large firms and end up starting their own. The evidence in New Brunswick’s IT industry is pretty compelling. Most of the successful IT firms in this province have CEOs and executive teams that previously had worked for large firms such as Aliant. There are some that started up right out of university but most – the large majority – got experience and then started their own business.

But back to Friedman’s point. Would a million new entrepreneurs create the economic renaissance that he desires or would it just move us back to a pre-Walmart time with far more smaller mom-n-pops with high cost structures because of a lack of economies of scale? Friedman is implicitly (and explicitly) assuming these million new entrepreneurs would be Steve Jobs – but how many Apples can the economy handle?

Is there a law of diminishing returns to government efforts to stimulate entrepreneurship?

I suspect the best model focuses on creating the enviornment where serious entrepreneurs with truly innovative ideas can emerge. Just another pizza shop with plans to be the next Papa John’s is fine but I am not sure it should be government policy.

Invest heavily in university-industry R&D. Focus tax policy on innovative entrepreneurship – not just encouraging anyone to start their own business. Again, anyone who wants should be able to set up their own business but public policy should be more than just about cranking out more mom-n-pops and more about innovative products and services that are game changers in a specific market segment.

I think the experience in Atlantic Canada show us that we can’t just assume that making it easier to start a business will lead to better economic outcomes (economic development). We need to elevate the discussion beyond just a target for new entrepreneurs (Friedman’s million) to a target for new game changing entrepreneurs.

7 Responses to Is there a law of diminishing returns on entrepreneurship?

Great post. If we could target small companies, say 10-35 people, that have been operating successfully and exporting for 15 years and help them double or triple in size, that would be a wonderful economic development initiate for the province. These companies have established customers, banking, cash flow, distribution, and some sort of a product portfolio making them excellent prospects for expansion (since these are all issues that contribute to start ups failing).

These small companies don’t normally need an army of government consultants; they generally need the desire along with money and/or risk mitigation.

The positive spin on this is that there is low hanging fruit here in New Brunswick. If we consulted a business directory it would not take long to identify a list of small exporting companies in business for 15 years. If we could help them to double or triple in size, that would be a lot of jobs created.

That certainly would be one component. But look at what is happening at UNB – which should be NB’s major R&D uni. A story in the local press a few days ago reported that UNB is facing a significant budget deficit and is looking at different options to reduce costs. That would not be a surprise to anyone who has followed the previous UNB admin’s failed undergrad enrolment model, but it might be a surprise to those who rely on local media for news.

UNB has polled alumni on what to do about this. Have they asked govt what critical areas the govt wants maintained in order to have strong R&D? Or does GNB even care? GNB should be telling UNB to transfer resources into science/engineering R&D and cut elsewhere. Anyone who thinks a strong R&D program is important to ED should be telling UNB the same thing.

One of the reasons successful entrepreneurs have splintered off from established companies is because they usually have identified both a market need and prospective customers and they develop their business around that.

The idea of an academic researcher growing a successful business around his discovery is heartwarming; we all want to beleive in it and it makes for great media stories when it happens. But it happens infrequently. Academics will say give us more time and more money and we will give you more results but often the problem is there may not be a market need for their idea.

To have a successful economic culture, we need a mix of academic research, anchor companies and entrepreneurs.

“The idea of an academic researcher growing a successful business around his discovery is heartwarming”

But irrelevant. Its R&D researchers producing ideas and products for companies large and small that has the impact. Visit any large R&D uni and you will see research parks populated by both small startup firms and large corporate research divisions. The relationship between R&D and successful economies is well-established.

“But it happens infrequently.”

Irrelevant. RIM happens infrequently; Xerox happens infrequently; Microsoft happens infrequently. Its not frequency that matters so much as impact.

“To have a successful economic culture, we need a mix of academic research, anchor companies and entrepreneurs.”

Thanks for agreeing with me and David. NB in particular and Canada in general lack enough corporations willing to invest in R&D. That’s why the unis need to step up to the plate. They have to do that by reallocating resources into science and engineering R&D.

I agree with this part: “Invest heavily in university-industry R&D. Focus tax policy on innovative entrepreneurship – not just encouraging anyone to start their own business. Again, anyone who wants should be able to set up their own business but public policy should be more than just about cranking out more mom-n-pops and more about innovative products and services that are game changers in a specific market segment.”

Except that tax policy only helps people who are already paying taxes, which means it filters out lower-income people from assistance. I would prefer something more innovative than tax policy (which, more and more, comes to mean ‘subsidies for rich people’).

Stephen, if your idea of “rich people” means people already paying taxes, then I’m a little concerned about your comment. A combined household income of $50,000 carries burdensome tax liabilities, however they are by no means a rich family. We have to be realistic here as well, and acknowledge that social assistance recipients aren’t going to be a noticeable portion of the leading entrepreneurs. Yes it is unfortunate, however the reality of the situation remains the same; candle making and seamstress businesses aren’t going to pave the way to self sufficiency.

A reward policy should be implemented whereby we reward companies who’ve increased their workforce by 40%, rather than handing over money that will be used to buy new furniture for the boss’ office but was intended to be earmarked for expansion efforts.

The reality is that most new industry today is NOT labour intensive. Part of the reason funding was a problem in the past was every time somebody wanted to fleece the government they’d simply say they were going to employ hundreds. I’ve had personal experience in this, and I know that if you go in there wanting ANYTHING and you aren’t employing ten people, they won’t talk to you.

Stephen’s point is a salient one and he’s not talking about ‘a home’. The fact is that ‘research’ won’t necessarily make money, so if you want to build a research facility, giving them tax breaks won’t accomplish anything.

For the poor, that’s different. The biggest lie out there is that the ‘entrepreneur’ is some cowboy who does everything themselves. An entrepreneur needs a ‘team’ as much as a corporation does. In researching these companies at the Waterloo tech park, you’ll see them talk about the most important facet being ‘mentorship’, usually as important as funding.

And again for the poor, its not true that they can’t be entrepreneurs, in fact they usually make the best ones, unlike others they typically know all about being ‘self sufficient’ and tend to be tightwads, unlike these corporate guys that get millions and a good part is so they can keep their lifestyle. That’s why in most of the world they have micro loans and community credit unions. Any small business man will tell you the biggest problem with funding are banks being unwilling for all kinds of reasons.

The unfortunate aspect is that entrepreneurs simply can’t do it alone, which makes for an ideal opportunity for government. I remember reading about how the worst aspect of poverty is that it wasted so many resources. I just downloaded Bryce 6.3, that’s the 3d creation and animation program quite similar to Maya, and the total cost was $50, almost nothing-in fact there is a similar one called Blender which is completely FREE. And these are the jobs and skills that are in demand, and the tools cost almost nothing and you can create product that every movie studio, animation house, commercial producer, etc., are purchasing.